Leverage your Sales Commission System

Transcription

1 Leverage your Sales Commission System How your sales commission data can drive increased sales performance and corporate profitability As an executive, you know one of the best performance management tools in your toolbox is your sales compensation program. No other program will drive sales behavior, and, ultimately, sales results, to the same extent as incentive compensation. Getting salespeople to sell the right products and services to the right customers at the right price is the best way to increase revenue and profits, and compensation is the best lever to motivate sales people. The management truism, "what gets measured, gets managed and what gets managed, gets done," is spot on. Sales representatives are much more likely to work toward a company's strategic goals when properly motivated by well-designed, accurately calculated, and frequently communicated sales compensation plans. Achieving these goals requires a proper technology foundation one that supports agility, speed, accuracy, flexibility ity and analysis. Unfortunately, in most organizations, this technology foundation is absent. In fact, most companies today manage sales compensation programs with Excel spreadsheets and Access databases. Does yours? As a result, sales executives are handcuffed by slow, rigid, and unsophisticated systems that provide no strategic value, and sales representatives are frustrated and de-motivated by delays, errors, and uncertainties in their commission payments. The result is the "Performance Gap". The delta between the performance results executives expect from their sales compensation programs, and the technological capability to support the achievement of those results. An Automated Foundation to Achieve Your Sales Performance Management Strategy WHY SPREADSHEETS AND LEGACY SYSTEMS ARE INSUFFICIENT Commissions, bonuses, and related sales incentive programs (contests, sales promotion incentive funds) should motivate sales teams and keep them laser-focused on achieving and exceeding desired performance results. In fact, according to the analyst firm Gartner, companies that fail to execute sales compensation effectively and in a timely and accurate manner will decrease sales productivity by 20% due to lost selling time, reduced motivation, and "shadow" accounting meaning the time sales reps spend reconciling ciling their commission statements due to mistrust in the corporate system. Gartner goes on to say that by automating incentive compensation management, you add significant value to the entire sales process. Automation eliminates repetitive, labor-intensive and error-prone, manual processes while providing accurate and timely commission, ranking and attainment information that will keep reps motivated. In addition, it provides detailed results analysis that gives management time to course-correct should they spot performance issues. Today, most companies rely on systems that are inadequate for administering such a key financial cost center never mind managing and driving superior sales performance. Effectively administering sales compensation is most often easier

2 said than done. For most companies, calculating and paying incentive-based compensation is a data-intensive, calculation-intensive, tedious, and thankless task that can consume hours of time for teams of compensation analysts, corporate and sales controllers, and sales administrators. While sales compensation is recognized as the key component of sales performance management, it remains the most significant cost center yet to be automated. While ERP, CRM, supply chain management and other systems have been implemented, the key "system" responsible for driving sales performance is typically a series of Excel-based spreadsheets or an outdated, home-grown legacy application. Consider the following scenario one familiar to many sales VPs: You are the senior sales executive for a publicly-traded, diversified $500 million medical products manufacturing firm with 200 sales representatives. THERE ARE FIVE SEPARATE DIVISIONS Each division has 40 sales representatives that report to a divisional sales vice president. Those 40 sales representatives are divided by territory; new representatives receive a recoverable draw (bridge loan) of $3,000 a month for their first six months. The divisional sales vice presidents report to you as the executive sales vice president. EACH DIVISION HAS DIFFERENT COMPENSATION PLANS Some plans call for split commissions and team sales by account. The company has 1,500 different products. Some products are sold by multiple divisions. 50 percent of a sales commission is paid upon receipt of a signed contract. The other 50 percent is paid upon product shipment. All plans have charge-back provisions if products are returned. There are quarterly bonuses and monthly SPIFs on top of the annual quota. Sales of certain older products earn commission, but do not apply toward the sales representative's quota. THE COMPANY PROCESSES ABOUT 50,000 SALES TRANSACTIONS EACH MONTH Transaction feeds originate in multiple disparate systems. The number of spreadsheets and embedded macros necessary to simply calculate commission payments in this relatively standard scenario is mind-boggling. Now imagine what happens when a new product is introduced, or organizational hierarchy changes are made or new compensation plans need to be implemented. It typically takes weeks, or even months, to implement these changes. In the meantime, sales teams become misaligned as obsolete plans drive the wrong behaviors. Revenue opportunities are missed, or worse, lost to competitors. And once the plans are in place, sales reps usually have no corporate-provided insight into their commission earnings until days or weeks after the close of the period. So they waste valuable selling time managing their own spreadsheets to track their sales, then waste more time reconciling their spreadsheet with the commission statement they finally receive. The cycle repeats again and again, sales performance suffers, opportunities are lost, and revenue is negatively impacted.

3 The Tactical Pain from Improperly Managed Sales Performance is Significant Given the incredibly complex nature of incentive management calculations, sales compensation is an Achilles' heel for companies of all sizes; particularly those with growing, or multi-channel sales forces. On a tactical level, it affects virtually everyone in the sales organization in obvious and subtle ways: 1) IMPACT ON REVENUE GROWTH LOSS OF SALES FOCUS According to Gartner, sales representatives spend 3-8 hours per pay cycle shadow accounting because they do not trust the calculations that generate their commission payments. Then, they waste more time arguing their case if their paycheck doesn't match their own calculations. In our sample scenario above, 200 salespeople could waste as many as 1600 hours per month shadow accounting, or roughly the monthly time equivalent of nine full-time salespeople. Instead of focusing on crunching numbers, your sales teams should be out selling. LACK OF VISIBILITY Compensation analysts, sales representatives, and sales managers typically do not have mid-cycle visibility into how they or their sales teams are performing. In fact, quite often commissions and cost of sales results are unknown until well after the end of a pay period. This lack of visibility makes it difficult to adjust plans and strategies mid-cycle to avoid sales and revenue shortfalls. In addition, it leads to questions regarding commission calculation results, which wastes the time of both reps and administrators - time that results in lost sales revenue and increased administrative costs. MISALIGNMENT The only thing constant is change. Markets evolve, strategies adjust, and leadership changes. Most organizations use homegrown or spreadsheet systems to support their SPM efforts systems that require IT support to change or modify compensation plans. Unfortunately, as the sales executive you are not the top priority for IT, which means help is often late or delayed. As a result, it is difficult to keep the system, and consequently the sales team, aligned with new business drivers. Commission plans quickly become obsolete as sales organizations, territories, quotas and business goals change, resulting in sales plans and consequently sales teams that are misaligned with corporate sales objectives. LOW SALES REP MORALE Poorly implemented sales compensation payment and tracking systems affect every sales representative. When payments are late, it creates a major "disconnect" between the representative's sales activities (behaviors) and their compensation (reward). Without a clear link between the work and the reward, the power of the incentive is greatly diminished. Paying commissions and bonuses late seriously erodes morale and greatly decreases motivation. INABILITY TO PREDICT INCENTIVE PAYMENTS A company's critical pipeline forecasting, even using sales force automation tools, is an art; it's very soft, and it is at best

4 predictive. Disparate systems make it difficult to get the historical performance data needed to build accurate forecasts, predict plan results, and estimate costs associated with sales. There is often an inability to test or model plans to analyze and predict the cost-effectiveness of proposed plans. As a result, plans are built on intuition and best guesses, leaving the company at risk for unexpected cost of sales liabilities. 2) IMPACT ON OPERATIONAL EFFICIENCIES INADEQUATE TOOLS Most compensation teams and analysts use spreadsheets to create, track, and model compensation plans. Unfortunately, spreadsheet software solutions present many limitations. Spreadsheets are fundamentally designed for a single user. Compensation plan models built with spreadsheets are difficult for any user other than the builder to understand. With their macros and cryptic cell-based formulas, they are also fragile and difficult to change as business conditions change. What's more, they cannot adequately handle true enterprise-class data volumes or "remember" what has changed within each cell over time. Spreadsheet-fronted legacy applications can be just as problematic, requiring lots of IT investment and intervention, which slows the compensation calculation process down. In fact, calculating incentive pay typically consumes more than one person per month per pay period. This time could be much more effectively used to devise new incentive programs, analyze the effectiveness of different initiatives, or optimize the corporate compensation plan. NIGHTMARE ADJUSTMENTS Ask any compensation professional and they will quickly tell you one of the worst problems to handle is prior-period period adjustments. Maybe it's a cancelled sale. Or perhaps the compensation plan changed. The ripple effect, particularly in a spreadsheet model, can be a nightmare. The cancelled sale or returned product could mean that a sales representative missed quota for the quarter. That means the rep was overpaid. It could mean their commission percentage for the current quarter should be lower; maybe their divisional sales vice president's bonus was too high. In some cases, it can even mean incorrect accruals and inaccurate financial statements. Without a firm time dimension to the data, adjustments continue to make the compensation management problem very difficult and create risk for compliance with Sarbanes-Oxley. POOR REPORTING Spreadsheets s are not designed to provide the proper reporting and auditing required for transactional-based activities. Without this reporting, there is no true accountability; finance executives lack real-time information, sales managers cannot get timely visibility into results, and employees cannot measure their performance against their plan or their peers. UNACCEPTABLY HIGH COSTS Legacy and spreadsheet applications used for incentive compensation management aren't just difficult to administer, they're also expensive ensive to maintain. According to a study by Growth Solutions, medium-to-large-sized companies spend on average $2,500 for each employee on plans managed by these applications. Direct costs represent half of the $2,500, and would be significantly reduced with an automated system. The other half is

5 indirect costs opportunity costs that impact the bottom line. These costs would be completely eliminated with an automated SPM system. UNACCEPTABLY LOW ACCURACY Given the complexity of the data and the relative limitations of the tools, accuracy is an issue. Analysts like Gartner, Meta Group and Aberdeen estimate that spreadsheet-based systems could have an error rate of over 10%, and even higher for those organizations ations that have many prior-period period adjustments. Underpayments cause focus, trust, and retention issues. Overpayments fall right to the bottom line, adversely affecting profitability. SARBANES-OXLEY COMPLIANCE Spreadsheet-based solutions are wholly inadequate in meeting corporate governance requirements for systems related to a company's financial reporting. These systems lack an automated, standardized process for commission calculations. With no valid audit trail, inadequate security and questionable accuracy, curacy, organizations using homegrown systems face non-compliance issues that put the company and its shareholders at risk. The Greatest Cost of All: The Performance Gap As thorny as these tactical challenges may be and as compelling as the returns that warrant investments in improving these processes may be they pale in comparison to the tremendous strategic opportunity cost of implementing a weak incentive plan that doesn't drive results simply because your system cannot handle the comprehensive, strategic plan your business requires. Hampered by a slow, inadequate, inaccurate system for planning and managing incentive-based compensation, company leaders are hamstrung in their efforts to motivate their sales representatives to the goals and timing that optimize profitability. The result is the Performance Gap, and it represents incredibly high opportunity cost and lost revenues that will never appear on the balance sheet. ELIMINATE THE PAIN, THEN GET THE GAIN Surgesoft, Inc. s PlanIt application is highly-scalable, performance-driven software that helps you plan, and manages all aspects of your sales compensation infrastructure.

6 Using PlanIt, your company can realize key benefits of a world-class sales performance management system: Visibility into day-to-day activity for salespeople, managers, executives, and analysts to motivate performance and facilitate decision making; Accurate, on-time payments build the trust needed to retain top sales talent and motivate them to achieve target performance metrics; Access to historical data for modeling and what-if analysis to more accurately predict commission payments and total cost of sales; Automated processes, complete audit capability, comprehensive security, and accurate incentive calculations ensure control and compliance; Alignment of compensation plans with corporate strategy to ensure everyone is working towards common goals; Ease of administration removes the burden from IT and puts the power in the hands of the compensation analyst to easily create, modify, and manage plans. TAKE IT TO A NEW STRATEGIC LEVEL IN 5 STEPS Once you've deployed an operational system such as Surgesoft Inc. s PlanIt to streamline the tactical aspects of sales performance management, you're ready to take it to a new, strategic level. STEP 1: Define Compensation Plans in Alignment with Overall Corporate Goals STEP 2: Streamline a More Integrated Process STEP 3: Communicate and Motivate STEP 4: Gauge Effectiveness STEP 5: Adjust On the Fly and Close the "Performance Gap" STEP 1: DEFINE AND IMPLEMENT COMPENSATION PLANS IN ALIGNMENT WITH BIG PICTURE CORPORATE GOALS One of the first steps to effective strategic sales performance management is defining (and modifying when necessary) appropriate incentive compensation plans, then implementing them for production use. While this is theoretically possible with spreadsheet-based tracking systems, it isn't terribly practical for organizations with more than 25 sales representatives. However, sophisticated sales performance management systems like PlanIt enable you to create and modify plans as needed. Each sales representative is motivated by plan elements that reflect their unique sales tasks and responsibilities. For example, the plan could include compensation based on profits versus revenues, sales of new products, or acquisition of new customers.

7 Customized compensation plans are the embodiment of the company's strategic direction. They are instructions to each sales representative that explicitly state the precise performance that the company desires and expects. Designed properly, the incentive plan is a powerful and unambiguous motivator. STEP 2: STREAMLINE A MORE INTEGRATED PROCESS Once you have defined your sales compensation plans and leveraged PlanIt's best-practice compensation templates to build the plans with the complexity and granularity that makes them both strategic and tactical you can begin to use those plans to drive performance and profitability. That is why it is essential to have a comprehensive, automated foundation underpinning your efforts. In addition, integration with front-office and back-office fice systems such as financials, logistics, human resources, customer relationship management (CRM), sales force automation (SFA) and order/fulfillment is essential for streamlining the calculation, reporting, and payment process. Using PlanIt, input transactions actions come in cleanly, and postings to payroll and general ledger for payment tracking and expenses are seamless. PlanIt automatically calculates payments for your employees rapidly and accurately. And as a data-driven SPM solution, PlanIt provides a solid foundation for detailed reporting and analysis. STEP 3: COMMUNICATE AND MOTIVATE The right plan is only part of the equation; motivation comes from understanding how you are performing against your plan. Salespeople do not want to wait until the end of the quarter to learn how they did; they continuously want to know, and need to know, how they are doing via up-todate information on performance and commissions earned. By providing fast, accurate feedback, Surgesoft Inc. s PlanIt provides the power to motivate. To leverage sales compensation as a strategic tool, you need to provide near real-time access to appropriate levels of information. With Surgesoft Inc. s PlanIt, individual contributors, for example, have secure access to their own information; their commissions earned to date, transaction details behind those commissions, and motivational information such as their ranking against their peers. Managers have access to their

8 own personal performance information as well as that of their subordinates. They may even view corporate attainment information so they can see how their team is performing relative to other teams. Following the close of a period, PlanIt provides sales representatives detailed commission statements so they understand how the payment was calculated, reducing payment disputes. And if there are still questions, they can easily be answered through automated dispute resolution processes. By putting timely, accurate information in front of your sales representatives, you create a stronger link between activities, goals, and rewards. PlanIt gives your company a stronger pay-for-performance environment with greater ability to retain personnel in a competitive marketplace. Losing a salesperson is not only losing experience and an investment in recruiting and training, but also a loss of their relationships with customers. Without an integrated, flexible, and consistent system in place to guide the sales force, you will continue to experience productivity and turnover challenges. STEP 4: GAUGE EFFECTIVENESS Until you have an integrated an automated sales performance management system, gauging the effectiveness of sales compensation programs is nearly impossible. With a comprehensive SPM system like PlanIt, you gain greater perspective on the effectiveness of current sales performance programs and also insight into the implications of changes to your programs. Modeling gives you and your management team the control to evaluate new compensation programs, better manage quotas, anticipate the impact of revenue and organizational changes, and properly accrue the cost-of-sales or commission expense. See in advance how a change will impact groups of payees. Or forecast expenses, revise quotas and attainment distributions, and measure results through what-if analysis. With executive level, fact-based reporting from a centralized source, you can make the right decisions to support change. STEP 5: ADJUST ON THE FLY AND CLOSE THE "PERFORMANCE GAP" No sales plan remains optimal forever. Market conditions change. Companies change. Strategies change. Management and organizations change. That's why, to retain its power and relevance your sales compensation plans (and underlying metrics) must adapt quickly to changes in the organization and the marketplace. Unlike spreadsheets, true sales performance management systems, like PlanIt, can easily accommodate mergers, acquisitions, new product introductions, reorganizations, and other changes that are common in successful enterprises. By adjusting on the fly, you can "close the gap" and create an iterative cycle of sales performance management.